How to Include Cryptocurrency in Your Estate Plan
By now, almost everyone has at least heard the term “cryptocurrency” and some people actively buy, sell, and use cryptocurrency on a regular basis. If you own cryptocurrency, how does it fit into your estate plan? To help shed some light on the subject, the Indianapolis estate planning attorneys at Frank & Kraft explain some cryptocurrency basics and discuss how to include it in your estate plan.
What Is Cryptocurrency?
If you were born before the Millennial generation, cryptocurrency may be a somewhat elusive concept to you. It sounds like a type of currency, and can sometimes be used as a currency, but you cannot hold it in your hands like you can a dollar bill or a euro note. So, what is cryptocurrency?
Cryptocurrency is a digital asset created by computer operators referred to as “miners.” These units of digital currency are record on a “blockchain” which, despite popular belief, is made up of a string of verified public transaction records. What is not public is the identity of the holder of cryptocurrency. Instead, traders of cryptocurrency are assigned a “wallet number.” That wallet number is vital to accessing, trading, or using cryptocurrency. There are literally thousands of cryptocurrencies currently being used, with more being added daily. Common cryptocurrencies (“crypto”) include Bitcoin, Ethereum, Chainlink, and Dogecoin. While cryptocurrencies have been widely traded for some time now, more and more businesses are starting to accept crypto as a form of payment. Elon Musk even announced that Tesla may begin accepting Bitcoin as a form of payment when purchasing a vehicle.
How Is Cryptocurrency Defined by the Law?
Whether you own crypto as an investment or with the intent to use it as a true currency, you need to understand how crypto is viewed and treated from a legal standpoint. For instance, the Internal Revenue Service (IRS) defines cryptocurrency as property — not as currency. This means that profits from trading or selling crypto are subject to capital gains taxes. Exchanging one cryptocurrency for another will also trigger a taxable event. By the same token, a cryptocurrency loss may be claimed on your tac return to help offset your tax obligation.
Gifting Cryptocurrency in Your Estate Plan
If you own cryptocurrency, it should be specifically identified and included in your estate plan. Keep in mind that because crypto is considered an asset, gifting cryptocurrency (during your lifetime or at the time of your death) requires you to know what basis will be used and what the tax implications of that gift will be. The inherent volatility of cryptocurrency means that extra care should be taken to document the basis of the asset and the value at the time the gift is made. A professional appraisal of the value is always a wise idea, particularly if you are gifting high value crypto; however, documenting the publicly traded value of the crypto on the date of transfer should be done at a bare minimum. Moreover, a cryptocurrency gift may trigger the need to file a gift return and may count against your lifetime exemption to federal (and/or state) gift and estate taxes.
Another issue with including cryptocurrency in your estate plan is the actual process of transferring ownership. Despite being considered an “asset,” there are not ownership documents, titles, or other legal documents created when you purchase crypto. Therefore, if you plan to gift the crypto you own, you should execute a gift memorandum and request a gift receipt. Within the memorandum you should include the type and quantity of crypto being gifted, the fair market value, and your basis in the asset.
What may be even more important, however, than any of the previous suggestions is the need to identify the cryptocurrency being gifted and ensure that the recipient can access the asset. Without the correct “wallet number” and any required codes, the recipient cannot access the cryptocurrency. Unlike things such as a safety deposit box, financial account, or retirement plan, absolutely no one – not even a judge – can access cryptocurrency without the required information. Consider including the needed information in the memorandum or in a Letter of Instruction. The double edge sword in this scenario is that anyone in possession of that wallet information will be able to access the crypto and you will have virtually no recourse. So, while you must provide the intended recipient with the wallet information, be sure not to unintentionally provide that same information to someone else.
Contact Indianapolis Estate Planning Lawyers
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about including cryptocurrency in your estate plan, contact the experienced Indianapolis estate planning lawyers at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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